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Leading the News: Intel Warns on Revenue Growth --- Profit at Chip Maker Surges, But Firm Remains Dogged By Lackluster PC Demand
Wall Street Journal; New York, N.Y.; Oct 16, 2002; By Don Clark;
Abstract:
More surprising, analysts said, was Intel's third-quarter gross profit margin of 49%, about flat with the second period, excluding a charge related to Intel's decision to close a Web-hosting business. The company predicted in July that it could boost that margin to 51%, plus or minus a couple of percentage points. The company said it expects its gross margin to remain at about 49% in the fourth period, instead of remaining at about 51%.
Intel said it doesn't believe an adverse ruling last week in a patent case filed by Intergraph Corp. will end up having a material impact on third-quarter results. The ruling could require Intel to pay at least $150 million. Intel plans to seek reconsideration of the ruling, and expects to amortize any payments over a period of years in any case.
John Lau, an analyst at RBC Capital Markets, said he is confident that Intel can resume cutting costs to improve its gross margins. He is projecting a PC-market recovery in the second half of 2003, but Intel has the "strength and leverage" to make money even if market growth remains below 10% annually. "This is a tremendously profitable company," he said.
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|Copyright Dow Jones & Company Inc Oct 16, 2002 |
Intel Corp. posted a big jump in third-quarter profit but projected tepid revenue growth and disappointing gross profit margins for the current quarter.
The remarks by the No. 1 chip maker, a bellwether for the high-technology sector, contrasted sharply with upbeat results from other companies that sent stocks surging earlier in the day. Intel continues to be dogged by lackluster demand for the personal computers that use its microprocessors, and its latest results indicate it is behind schedule in wringing cost savings from its manufacturing operations.
Before the announcement, Intel's shares rose 9.4%, or $1.42, yesterday to $16.52 in 4 p.m. trading on the Nasdaq Stock Market. Following the news, Intel was the most-active stock after-hours, with 18 million shares trading, falling $2.13, or 13%, to $14.39.
The Santa Clara, Calif., company reported quarterly net income of $686 million, or 10 cents a share, compared with $106 million, or two cents a share, in a dismal year-earlier period in which profit dropped 94%. On a nonstandard basis that excludes acquisition-related costs of $108 million, Intel said its latest earnings per share were 11 cents, below analysts' consensus of 13 cents on the same basis, as tallied by Thomson First Call.
Revenue was $6.5 billion, roughly flat with $6.55 billion in the year-earlier quarter and in line with Wall Street expectations.
For the fourth quarter, Intel forecast a revenue range of $6.5 billion to $6.9 billion, indicating sales may not reach analysts' consensus of $6.92 billion, as reported by Thomson First Call.
More surprising, analysts said, was Intel's third-quarter gross profit margin of 49%, about flat with the second period, excluding a charge related to Intel's decision to close a Web-hosting business. The company predicted in July that it could boost that margin to 51%, plus or minus a couple of percentage points. The company said it expects its gross margin to remain at about 49% in the fourth period, instead of remaining at about 51%.
"You don't often hear of missed execution at Intel, but that's just what they did," said Douglas Lee, an analyst at Banc Of America Securities.
Andy Bryant, Intel's chief financial officer, said weak revenue combined with the company's failure to realize expected savings in manufacturing costs. In response, Intel said it will cut its capital spending for 2002 to $4.7 billion from the range of $5 billion to $5.2 billion it set after the second quarter, and below its original projection for the year of $5.5 billion.
On a brighter note, Intel Chief Operating Officer Paul Otellini said the company's share of unit sales of microprocessors gained three percentage points in the quarter. Intel, which has been using price cuts and new-product introductions to take business from Advanced Micro Devices Inc., didn't disclose an updated figure for market share but has been generally estimated to control about 80% of the market for PC microprocessors.
"We are in a situation where we've gained market share, where we've cut capital spending and we've reduced head count, but end demand is soft," Mr. Bryant said.
Intel's strategy during the downturn has been to accelerate a shift to more advanced manufacturing processes, creating chips that are faster than competitors' and less expensive to make. Mr. Bryant said that trend, along with savings from lower materials costs and labor-saving steps, has generally produced manufacturing cost reductions of 3% to 4% a quarter.
But the pattern broke down in the third quarter, he said. Intel also had increased costs due to excess capacity in its older production processes.
Meanwhile, a customary seasonal rebound in spending remains at the weak end of historical patterns, leading to Intel's prediction that fourth-quarter revenue could be flat to only as much as 6% higher than the third period. Intel should begin to get cost benefits from recent work-force cuts in the current period, he added.
"Until we see more of a recovery in our business, we must remain vigilant in cutting costs and saving cash," Mr. Bryant said.
Intel said it doesn't believe an adverse ruling last week in a patent case filed by Intergraph Corp. will end up having a material impact on third-quarter results. The ruling could require Intel to pay at least $150 million. Intel plans to seek reconsideration of the ruling, and expects to amortize any payments over a period of years in any case.
John Lau, an analyst at RBC Capital Markets, said he is confident that Intel can resume cutting costs to improve its gross margins. He is projecting a PC-market recovery in the second half of 2003, but Intel has the "strength and leverage" to make money even if market growth remains below 10% annually. "This is a tremendously profitable company," he said.
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